The development cost to bring any real estate property to the market continues to increase. Delaware Statutory Trusts (DSTs) will incur many of the same costs but typically these costs are rolled up into a completed property offering.
Updated Post: February 6, 2024
Original Post Feb 13, 2022
By Al DiNicola, AIF®, CEPA™
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC Member of FINRA/SIPC
There may be finders’ fees for locating and negotiating properties acquired by the sponsor to be packaged as a DST. There may also be loan fees paid on the financing if there is a debt component on the DST acquisition. There may also be short term financing (known as bridge financing) enabling the sponsor to acquire the property this bridge is paid off when funds are raised from individual investors. All costs are referenced (in the industry) as the “LOAD.”
What is a “load”? When an individual or investors purchase traditional real estate there are costs that are added to the purchase price (or included in the purchase price) to come up with the total cost. This cost may be title insurance, inspection cost, fees for the loan that may be place on the property to purchase the property. Add to that potential escrow for insurance, taxes and other costs do add additional cost to the purchase. If you are buying from a builder all of the cost of permitting, impact fees (if applicable), carrying cost as well as the soft and hard costs of construction are wrapped into the purchase price. Many investors who regularly purchase real estate simply consider these cost up to the normal course of acquiring a property. First time buyers of traditional real estate may be surprised at the additional out of pocket costs that add to the deposit or cash needed to close. Lenders on traditional real estate may limit the amount an investor may add to the purchase price (to finance cost). In traditional real estate we don’t typically call this a load but there is a period of time investors need to hold the property in order to break even if the property is sold. Prior to the recent unprecedented increase in values in real estate in some sections of the country the holding period as a rule of thumb was 5 years. Besides recovering the cost of acquisition investors also need to account for the cost of selling the property when the time comes.
DSTs also have additional costs but are packaged a little differently. One of the benefits for potential investors in a DST is the full disclosure of the fees associated with the acquisition of the cost. These are easily reviewable in the Private Placements Memorandum (PPM). All investors must receive and review the PPM prior to investing in a DST.
These cost as in addition to the actual purchase price and closing cost of the property. There may also be interim financing (bridge loan) enabling the sponsor to acquire the property. This financing will be retired or paid off once capital is raised from individual investors.
There is a need for funding or capital to fund reserve accounts and other fees associated with the initial acquisition of the property that will be packaged as a DST. There are legal fees for the structure of the DST as well as filing with the SEC. The DSTs are normally registered as a Regulation D 506 (b) or 506 (c). These would be a non-exclusive safe harbor under section 4 (a) (2) of the securities act. Because DST is a security offering only accredited investors may invest in. This would be reflected in the PPM as Organization and Offering Expenses. There is a Marketing Allowance to provide support materials and cost involved with exposing the DSTs to the market (including Due Diligence materials). There would be normal commissions paid to a real estate broker if involved with the acquisition of the property by the sponsor of the DST offering. There are upfront selling commissions that are allocated for the representatives who would secure the individual investors acquiring an interest in the DSTs. (This was covered in Part 6). All of these costs are considered a “load”.
Covering your costs should be considered so that you have all your capital returned when the property/asset is sold at the end of the holding period. The more fees added to the acquisition price require a higher sales price for the underlying assets owned by the individual investor. Investors should focus on not only a profit at the end of the terms but the preservation of the investment capital. Capital preservation would need to include selling for enough profit to cover the “load”. The DST sponsor takes these into consideration when preparing the DST underlying asset to be sold. Owning real estate on your own also may require the hiring of a property manager who over sees the asset. Another benefit in the DST is the passive nature of the investment where the property is professionally managed. While this is not an acquisition cost it is considered an operational expense.
Look for Part 8: Limitations of a DST
DST’s (Delaware Statutory Trusts) are for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and compliment your financial objectives. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, in any form, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062 MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
